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A deep-rooted structural change in US scrap mart threatens to pinch supplies

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The words "supply driven" or "supply constrained" seem to be popping up more often in conversations with scrap processors and brokers. Some might argue that it's just a short-term situation that occurs infrequently. Winter weather can assume the blame—peddlers and small dealers take a break when snow starts falling, while the larger yards are reluctant to operate much of their heavy machinery because equipment breaks down more often in the cold and the snow makes repairing it that much more difficult.

The cold weather normally has little impact on industrial scrap generation. Plants still make vehicles and appliances regardless of the outside temperature. The only critical problem is transportation. Picking up roll-off containers or scheduling a railcar loading can be a problem. Snow slows all traffic, and gondola cars or truckloads of No. 1 bundles and No. 1 busheling may not arrive as soon as anticipated.

For those mills operating with a minimal amount of scrap on the ground or just-in-time inventory management of raw materials, winter sometimes means a shipment of scrap arriving a few days late—not simply a few hours late.

This notion that supply, or lack of it, is driving the scrap market and setting the price may have longer-term implications for steelmakers and foundries. Some dealers and brokers believe that supplies of obsolete scrap aren't shortened just by winter weather. There is, as some would say, a structural change to the market.

U.S. exports of ferrous scrap have more than doubled in the past two years, much of it shredded scrap and the heavy melt grades. When that material goes overseas, it won't come back into the U.S. steel recycling loop some 20 or 30 years from now. Much of it is being made into rebar for construction projects in China and the Middle East. When those bridges and buildings are torn down at some date far in the future, the scrap steel is not likely to come back to this country—it will remain in the local markets.

Scrap buyers at mills pooh-pooh the notion that obsolete scrap could be "supply constrained." Drive around the countryside, says one buyer, and you still see plenty of old tillers and tractors rusting away on many farms. Also, says another, the infrastructure replacement work that the Obama administration is funding will add to the supply when the girders from old bridges are torn down and shipped to scrapyards to be cut apart.

That may be true .?.?. eventually. Those so-called shovel-ready construction projects have not yet overwhelmed the scrapyards with old rebar and I-beams and probably won't for the next few years. Even then, while much of that material will flow into local scrapyards, a substantial portion likely will be sold to major ferrous scrap exporters or their feeder yards. Even some of the tonnage that goes to the smaller processors will leave this country and find its way to foreign mills thanks to the growth of container shipping of ferrous scrap.

So what's a mill buyer to do when he finds that much of the scrap isn't coming back to his melt shop as it once did?

Some of the integrated steel mills faced a similar problem in the past decade when mini-mills invaded the flat-rolled steel market and started scooping up more industrial steel scrap. The integrated mills dealt with the problem by setting up buybacks with several of their major customers or discounting new steel products by the value of the scrap returned. These practices normally apply only to prompt steel scrap—the clips and trimmings from stamping presses, for example.

Are we likely to see this activity in other scrap markets? Will sheet steel be sold to automakers with the proviso that it be returned to the mill that made it when the car is junked and shredded 10 years hence? That may be a bit far-fetched, but there have been other developments in the steel industry in recent years that have been more than a little surprising.

Thin slab casting, for example, set the entire integrated industry on its ear. Some of the big mills that assumed they had a lock on the flat-rolled market are no longer around, and the steel girders and corrugated siding at their plants have been torn down and remelted into new steel products. Who would have imagined that the industry would one day cannibalize itself?

It isn't just obsolete scrap that is supply-shortened these days. Reduced manufacturing means a smaller volume of industrial steel scrap. That shortage has pitted integrated mills against their flat-rolled mini-mill rivals.

True, much of the flat-rolled steel produced by basic oxygen furnace (BOF) mills comes from iron ore and not scrap, but the integrated mills are still scrap buyers as well as consumers of their own home scrap. Some have even shifted part of their melt mix through the use of computer planning programs and are now buying railroad wheels and rail crops as alternatives for No. 1 bundles. And when demand for steel is inching upward and the blast furnaces are running at their peak, it's not unusual to see the big mills using scrap to boost the output of their BOFs.

One veteran broker argues that some of these mills have learned that even though the cost of scrap is a small portion of their overall melt cost, when they find themselves in competition not only with each other but also the mini-mills, the outcome is higher prices.

Higher prices won't bring many more bundles and busheling to the market, he says. That scrap is limited to the amount that is produced and comes into the market quickly. Few, if any, manufacturing plants are inclined to lay it down until the price goes up. Scrap is simply a by-product of their stamping presses, to be disposed of as soon as possible so it doesn't begin taking over space in the employees' parking lot.MICHAEL MARLEY

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